So are we gonna call it “crowdfunding” or what?

Last week I had the opportunity to attend the CrowdFundUSA conference in Atlanta, GA. Although there were the usual outstanding panels about everything related to crowdfunding, one panel stuck out in my mind.

The participants on the panel included CEOs Brian Dally from Groundfloor.us, Megan Johnson from Sparkmarket.com and David Lillenfeld from Sterlingfunder.com. In addition, Rodney Sampson, the well-known author of Kingonomics and founder of the Opportunity Hub in Atlanta was on the panel.

The presumptive topic of the panel had to do with intrastate crowdfunding, an area that has created a lot of discussion, but little action, over the past year. But Brian Dally (a notably outstanding speaker) brought up the problem with the overuse of the term “crowdfunding”.

As Brian correctly noted, the word encompasses so much territory. From a simple bake sale to a rewards campaign on Kickstarter to lending for a real estate project, “crowdfunding” really ends up being completely meaningless. Brian passionately (and correctly) argued that the use of the word “crowdfunding” was actually offensive as it related to companies that only raised money from accredited investors. Only 7% of Americans have enough income or net worth to be considered “accredited”. Brian rightfully believes that only opportunities that are supported by a broad “crowd”, which by definition includes more than a small sliver of Americans, should be allowed to be called crowdfunding.

This discussion engaged the audience and the other panel members. David Lillenfeld stressed that one of the issues that faced Sterlingfunder was the confusion and comparison with Kickstarter, where instead of shares of stock people receive token rewards. Brian noted that the term “microlending” actually tested better against other terms when marketing Groundfloor offerings. Megan formulated the term “micro angels”, which seemed to generate enthusiasm with the group.

I personally think the term “micro angels” is extremely problematic. After all, micro = small. And angels suggests someone who is about to lose their money in a new startup. The resulting pitch doesn’t strike me as persuasive. “If you invest in equity crowdfunding, you will be a SMALL LOSER.”

But everyone on this panel was exactly right: the use of the word “crowdfunding” is too broad to accurately communicate the public’s investing opportunity and the incredible funding and marketing power to the companies that effectively utilize it.

So what do you think?

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Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

May 12, 2014 1

Social Media Guidance Provided by the SEC

There is a great deal of angst in the securities law community about the limitations surrounding social media. Obviously the fact that general solicitation can be used at all is, as Vice President Joe Biden would say, a big f***ing deal. This means that companies can use newspaper or Internet advertisements to promote their private stock offering under certain circumstances.

However, there has been little clear guidance about what happens once a company publishes something on Twitter or Facebook, since that marketing message is no longer controlled once people can retweet or share. The lawyer concern is that the company no longer has the ability to control 1) the timing of distribution and 2) the message itself, since social media posts can be altered or commented upon by others. On April 21, the SEC gave some guidance on this issue. Nerd alert! (Don’t worry, I’ll translate to English below).

Question: Some electronic communication platforms, such as those made available through certain social media websites, permit users to re-transmit a posting or message they receive from another party. When an issuer distributes an electronic communication in compliance with Rule 134 or Rule 433, must the issuer ensure compliance with Rule 134 or Rule 433 of a re-transmission of that communication by a third party that is not an offering participant?

Answer: If the third party is neither an offering participant nor acting on behalf of the issuer or an offering participant and the issuer has no involvement in the third party’s re-transmission beyond having initially prepared and distributed the communication in compliance with either Rule 134 or Rule 433, the re-transmission would not be attributable to the issuer. As explained in Securities Act Release No. 33-8591 (July 19, 2005), “[W]hether information prepared and distributed by third parties that are not offering participants is attributable to an issuer or other offering participant depends upon whether the issuer or other offering participant has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information.” [April 21, 2014]

IN ENGLISH:

Question: Can a company get in trouble when it posts on social media and people start retweeting and doing crazy stuff?

Answer: No – you are fine so long as the person doing the retweeting/sharing is truly not affiliated with your company in any way.

This SEC interpretation is very important – and the result is obvious to most observers. However, securities attorneys are rightfully cautious. Getting securities advice wrong can have devastating results for a company.
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April 30, 2014 0

Reg A+, The “Real” Crowdfunding?

Raising money is awfully confusing. It seems like there are a never-ending number of legal restrictions from federal and state regulators. The fact is that most companies that raise small amounts of money ignore the law entirely. The remaining private companies that raise money almost always use “Rule 506” – part of Regulation D. That federal exemption permits companies to raise money from individual investors (provided most are wealthy – also known as “accredited) and there is limited interaction with state regulators. All the rest of the rules are basically unused.

One “unused” rule is called Regulation A. As it stands now, there are really very few Reg A offerings. The reason is that each individual state where a Reg A offering is made needs to approve it. You can imagine that is a big ol’ pain in the rear end! However, as part of the JOBS Act, there is something new. It is commonly called “Regulation A+”.

The rules have been proposed by the SEC. And unlike the proposed crowdfunding rules, there has been near unanimous support for those rules.

In short, in a Reg A+ offering, a company can:

1. Advertise that they are raising money.
2. Raise money from anyone (not just accredited investors).
3. Raise up to $50 million.

Attached is a copy of the comment letter that I submitted to the SEC. Of course, the proof will be in the pudding. But there is real reason to be optimistic. Although the letter is in legalese, hopefully the message will get through to the SEC. We want companies to be able to raise money – and we want every investor to have a chance to become involved with their favorite local companies.

sec comments reg a+

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